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Q&A with Robert Crosby: Why do Landowners Need a Softwood Lumber Agreement with Canada?

The Forest Landowners Association (FLA) recently spoke with Robert Crosby, FLA president and fourth-generation landowner, to get his perspective on the Canadian softwood lumber trade issue and its critical importance to private forest landowners in the U.S.

Q: Robert, for many years now the United States has had a trade agreement with Canada on the amount of softwood lumber that can be imported into this country. It’s easy to understand why an agreement is important to sawmills, but can you explain why landowners should be concerned?

A: There is a lack of understanding that there are two industries that are being damaged – sawmills and private landowners. Right now, the worst damage is being inflicted on private landowners, an industry that doesn’t exist in Canada. In the United States, we have excess inventory of softwood trees and could supply 85 percent of the domestic lumber industry’s needs without adding any additional capacity. With additional investment, American landowners could supply nearly all of the industry’s needs with little to no need for Canadian imports.

This supply issue coupled with the Canadian competition has resulted in the lowest real (inflation adjusted) prices in 60 years. This impact is felt primarily by small landowners, loggers, truckers, service companies, and all those that support forestry in primarily rural communities all over our country, but particularly those in the South and Northwest. The significant drop in revenue from timber sales over the last ten years has placed those communities and families dependent on a fair and competitive timber market at risk.

So, while the Canadian mills are seeing record profits in their Canadian and U.S.-owned sawmills, U.S. landowners and those dependent on their economic viability, including those who own the asset in their pension accounts, are seeing one of the worst markets in modern times. The American media has missed or at least misunderstood this fact, as have many in the government who should be protecting our economic interests and ensuring the industry’s survival.

Q: Wait a second, pensions? I was under the impression that this was a sawmill issue. I see the connection to landowners, but how can it impact our pensions?

A: Besides the millions of private landowners affected by a historically depressed market, there are multiple U.S. pension funds, both public and private, with hundreds of thousands of investors all over the country who have part of their retirement savings dependent on a fair, competitive, and healthy U.S. timber market. Therefore, it’s not only small landowners and their counties and parishes, which depend on the tax dollars that support their public-school systems and roads, that bear the burden, but also teachers in California and firemen in Massachusetts that are seeing diminishing returns in their pensions because of a fundamentally unfair trade agreement with our neighbors to the north.

Something is clearly broken when there are historical highs in delivered lumber prices, and historic lows in U.S. timber prices. There is no current correlation in the price of delivered lumber and the raw material that generates it. The U.S. landowner, along with those who invest in the asset for both its historic economic returns and the environmental benefits it brings to our country, are the ones who suffer.

Q: So how exactly would a trade agreement with Canada on softwood lumber imports affect prices to landowners? Aren’t prices just what a local mill can pay?

A: It used to be true in this industry that all markets were local, but that has changed over the years. When we sold timber ten years ago, there would be eight or more bidders for our wood. Now that number is down to one or, if you’re lucky, three. With the consolidation of markets brought on by a downturn in the industry led by the declining housing market and the advancement in technology at mills, we have much less competition for our wood. Couple that lack of competition with an oversupply of raw material and unchecked imports from Canada and it creates the perfect storm for landowners that I’m not sure how we’ll manage.

While we welcome the Canadian sawmill companies coming into depressed U.S. markets to buy and restart shuttered mills, they are managing to do so without creating a competitive market with other Canadian firms doing the same. Whether it is intentional or not, on a map it looks like they are dividing the South into their own private markets. Around 40 percent of the lumber mills in the South today are owned by Canadian companies. They therefore can control the pricing of the local timber in their new U.S. market while still owning mills in Canada, thus allowing them to use arbitrage to profit in two different markets.

In the next downturn in lumber prices, are these companies going to curtail and even shutter the Canadian mill they own or the U.S. mill? My guess is their raw material supplier, the Canadian government, will reduce stumpage prices to ensure that the Canadian mills will keep running and the Canadian mill employees and their families will not be left unemployed – at the expense of US landowners, loggers, mills, and all of the Canadian citizens not employed in the timber industry. Instead, the U.S. mill employee and their families will be the ones at risk of being laid off, while the U.S. timberland owner and investors will face depressed prices or no market at all.

If we don’t get a fair agreement now, both the U.S. mill worker and the U.S. landowner will be subject to business decisions being made by both the Canadian timber industry and the Canadian government. In the Southeastern U.S., 89 percent of the privately-owned forests are in ownerships of less than 1,000 acres. These landowners are particularly vulnerable to losing their rights as they seek new ways to continue owning their land.

Additionally, I agree when you say, “aren’t prices just what mills can pay?” But “what mills can pay” is in part determined by what other mills are paying for the same material, and if the landowner in Canada, the Canadian government, is charging sawmills in Canada less for their wood, then mills in the US are also going to pay less for their wood in order to remain competitive. It’s simple economic substitution of a comparable good at a lower price by the Canadian government, and it has large impacts on U.S. landowners and the U.S. timber industry. The single landowner system in Canada gives the Canadians an unfair advantage in price setting – that’s not a level playing field.

Q: How can this be a property rights issue?

A: When landowners cannot make money selling trees at a fair price they must find alternatives. These options include monetizing different aspects of their ownership such as developments rights, or different environmental services such as wetlands. Tools such as conservation easements are effective when they are used the right way, but they are now being used to replace cash flow lost to depressed timber markets, thus chipping away at a landowner’s bundle of rights. None of the alternatives can provide our country and rural communities with the historically strong economic impact of a healthy working forest – a forest that provides jobs, recreation, and other benefits far beyond those of any other land use.

Q: Any final thoughts?

A: Private forest landowners are carrying on a legacy of economic and environmental benefits that our nation has enjoyed for nearly a century. Especially in the South, the small size of the typical ownership and the varying management practices of individual forest landowners have created a very diverse business environment. Unfair competition and low prices increase the risk of consolidation, conversion of forestland to other uses, and a resulting loss of our diverse southern forest landscape.

Far beyond the mills that convert our trees to lumber, we support a supply chain that has an economic effect on the truck and tractor dealer down the road, as well as the retirement savings of countless people who have direct ownership of the land or have invested in the asset class. Owning and managing forests is not a business everyone easily understands, but its benefits touch us all. With a little help from our government to ensure a fair and level playing field with Canada, landowners will continue to proudly provide these benefits for another century. However, if we fail to protect these landowners from unchecked Canadian imports, we will be sending them down the road to losing their property rights, heritage, and all the benefits that they provide our society. It’s up to us, and with the proper leadership I know we will prevail.